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FCC probes wireless carriers, Google on early cancellation fees

UpdatedThe Federal Communications Commission stepped up its probe of wireless early termination fees, sending letters to all national service providers and Google, with pointed questions about the controversial penalties.

Early termination fees, or ETFs, have been a great source of consternation for consumers, resulting in multiple class action lawsuits in recent years as subscribers complained of hundreds of dollars in penalties for leaving contracts. In some cases, they were saddled with high ETFs even when they moved to areas where their carrier didn't offer service.

Carriers argue that the fees are tacked onto long-term plans so that they can offer discounts for the latest and greatest phones to consumers. They said that customers have choices and can buy phones at full price without long term contracts.

"We hope that there is a recognition by the FCC that these fees are part of the rate and rate structure that allows wireless carriers to, among other things, subsidize phone purchases," said Chris Guttman-McCabe, vice president of regulatory affairs for wireless industry trade group CTIA.

The issue has gained renewed attention with the recent decision by Verizon Wireless to more than double its early termination fee for some smart phone customers to $350. The FCC sent a letter to Verizon last month demanding explanations for the change. Some customers of Google's Nexus One phone could also get punished with up to $550 in fees from both Google and partner T-Mobile for leaving long term contracts early.

The FCC sent similar letters to AT&T, Sprint Nextel, Verizon Wireless, T-Mobile and Google, asking how ETFs are collected and the reasoning behind them. After the responses are received, the FCC might recommend a standard approach to explain their ETFs so consumers know what they are getting into when they buy a discounted phone in a long-term contract.

“The issue has been building particularly with the increased use of smartphones and the complexities that come with contracts associated with them,” said Joel Gurin, chief of the FCC’s consumer and governmental affairs bureau. He said that while the letters were focused on wireless phone ETFs, the agency has also considered similar penalties for broadband Internet service contracts.

The move was Gurin’s first as head of the consumer protection bureau and underscores the frustration consumers have expressed about contracts with their cellphone service providers. Last month, a Government Accountability Office report showed that contract and billing issues ranked as a top complaint by cellphone users.

As more people replace traditional landline phones with wireless services and migrate to Internet-capable phones, their experience from point of sale to termination of contract is often confusing, said Joel Kelsey, a policy analyst at Consumers Union.

"Consumers have been under the thumb of these abusive powers for years," Kelsey said. "We're glad to finally have a cop on the beat on this."

Verizon Wireless said in correspondence last month with the FCC that it raised ETFs for some smartphones because of the increasing costs of those devices. But it also said costs associated with advertising and store operations go into the economics of their ETFs. That doesn't sit well with Kelsey, who says that customers shouldn't have to shoulder the costs of running Verizon's business.

Here are the FCC’s questions:

1. Do your ETFs apply to all service plans or only some? If so, which ones?

2. What is the amount of the ETF for each service plan where ETFs apply? If there are different ETFs for different plans, what is the rationale for those differences?

3. How much of a discount on handset purchase is given in return for a consumer accepting an ETF? Does the amount of the discount differ by device, and if so, how?

4. Does the ETF itself vary by device (e.g., higher ETFs for advanced devices)? If higher ETFs apply to a certain class of devices, exactly how is that class defined?

5. Is it possible for consumers to buy a handset from you at full price to avoid an ETF? If this is possible, can consumers buy unsubsidized handsets online, as well as at brick-and-mortar stores?

6. Do monthly service rates and terms differ (1) between customers who assume a term commitment and accept an ETF, and those who don’t, and (2) between customers who purchase an unsubsidized device (either from your company or a third party), and those who purchase a subsidized device? If so, how do they differ, and what is the rationale for the difference? Can customers easily determine the impacts of their decisions and their rates and terms?

7. Are ETFs prorated so that the customer’s liability decreases over time? If so, what is the exact schedule by which they are prorated?

8. If a customer renews his or her contract without buying a new handset, does his or her monthly service fee change in any way?

9. How long is the trial period during which consumers can cancel their service without an ETF penalty? If they cancel, can they return the handset? If they return it, will they receive a full refund, no refund, or a refund minus a restocking and/or refurbishing fee?

10. When do consumers receive their first bill under your service plans? How does the trial period relate, if at all, to receipt of the first bill?

11. Are there consumer fees or charges in addition to ETFs if consumers buy handsets and/or service plans from online phone dealers, such as Amazon, LetsTalk, and Simplexity (d/b/a Wirefly), or from a service provider, if a customer does not complete the contract term? If so, what are they, and what are their levels, terms, and conditions? Do the fees or charges affect the ETFs and if so, how?

12. Press reports and public statements from wireless companies have attributed ETFs to several different factors. What is the rationale for your ETF(s), and how specifically do the structure and level of those ETF(s) relate to that rationale?

I love this sentence in the article that summarizes the position of the consumer advocate, which reads: "That doesn't sit well with Kelsey, who says customers shouldn't have to shoulder the costs of running Verizon's business."

So who exactly is supposed to "pay" for running Verizon's business -- the government? How about the people who voluntarily choose to subscribe to Verizon's wireless service?

My personal experience with this: Some years ago, I signed up for a "Family plan" with Verizon Wireless so that I could get a cell phone for my elderly father as part of my plan. [It was important, I thought, for him to have cellular access, as he was a widower who lived alone in a rural area.] In signing up for a two-year plan, I was required to give Verizon all sorts of personal information (Soc Sec number, Date of birth, etc.) about both my father and myself. Things went fine, bills were reasonable, I always paid Verizon timely, and things were fine.

Almost a year and a half later, my Dad died. I called to cancel his cell phone, fully prepared to provide the usual documents: death certificate, copy of papers naming me executor of his estate, etc. The usual stuff every other business needs to close the account of a deceased customer. I fully intended to honor my own two-year contract, but just wanted to turn off Dad's phone.

Verizon said they would only do so if I paid a $250 early cancellation fee. I explained repeatedly that my Dad had passed away -- that this really wasn't some "frivolous" reason for canceling his service. He wasn't moving to another carrier or trying to wiggle out of contract -- he was DEAD.

No way. Even death was not a sufficient reason for Verizon to waive an early termination fee. They absolutely refused to end his service unless I paid them a $250 cancellation fee.

I realize that I was the contract holder and legally responsible (though they certainly collected plenty of personal information about my father as their customer, too). I'm not arguing that Verizon did anything illegal in insisting on a $250 early termination fee -- just that it seems such an extraordinarily cold-hearted and cruel policy. [And, frankly, bad business, as it soured my enthusiasm for their company.]

In the end, it was cheaper to simply continue paying for Dad's service until our contract expired. But buyer beware: even in death, Verizon demands their fees.